Correlations of Stocks, Commodities Rising = Same Trade

Download 2010-3-1 Market Danger Sign: Tandem Moves by Stocks, Commodities –

As of Friday's close, the Dow Jones Industrial Average was down 1% in 2010. The Dow Jones-UBS Commodity Index, which tracks 19 commodities from aluminum to zinc, is down 3.8%. Last week, the benchmarks swung in sync with each other on two different days, as they have a number of times in recent weeks.

It isn't supposed to happen like that. For much of the past decade, oil prices often were propelled by concerns of looming oil shortages or rising demand in China. Stocks were far more responsive to corporate profits and irrational exuberance that eventually came back to haunt the market.

Now, both markets are being driven by government stimulus and low interest rates. When investors think the current environment will continue through most of this year, they bid up risky assets like stocks and commodities. When they worry higher rates are coming, these assets get sold off.

As a result, commodity investors are looking forward to the time when those markets trade based on good-old supply and demand.

"Lately, we've certainly seen the correlations be very high. There should be some deviation," says Nicholas Johnson, co-manager of Pimco's CommodityRealReturn Strategy Fund.

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